We are in the midst of the largest wealth transfer the world has ever seen.

Over the coming decades, the Baby Boomer generation will transfer tens of trillions of dollars to heirs, charities, and institutions, both in the United States and globally. This unprecedented shift of wealth presents an extraordinary opportunity, but also a significant risk, unnecessary taxation due to inadequate planning.

It is critical that professional advisors proactively help clients preserve wealth, reduce taxes, and protect family legacies. This article highlights one of the most powerful but underutilized tools available, the Charitable Remainder Trust (CRT), also known as a Capital Gains Bypass Trust.

What Is a Charitable Remainder Trust and How Does It Work?

The Charitable Remainder Trust (CRT) was introduced into the Internal Revenue Code in 1969[i].

An irrevocable Charitable Remainder Trust established by the owner of a highly appreciated asset prior to its sale may be used for:

• Real estate
• Closely held business interests
• Publicly traded securities
• Cryptocurrency
• Other appreciated assets

When structured properly and funded before an irrevocable offer to purchase is accepted, the trust can sell the asset without triggering immediate capital gains tax.

However, the rules governing CRTs are strict and must be followed carefully. While not exhaustive, some of the most important requirements include:

• The trust must be legally established and funded before an offer is accepted.
• A qualified analysis must demonstrate that at least a 10% present value of the trust’s fair market value will pass to charity at termination.
• The trust term must be either:
  • One or more lives in being, or
  • A fixed term of 20 years or less
• The transferred asset cannot carry debt.
• A qualified appraisal is required to determine fair market value at contribution.

When properly implemented, these trusts can dramatically reshape the tax outcome of a major asset sale in terms of increased income and decreased taxes.

The Benefits of a Capital Gains Bypass Trust

Establishing a CRT before selling an appreciated asset can produce multiple, layered benefits. Among the most significant are:

1. Capital Gains Tax Avoidance & Estate Reduction

The trust can sell the asset without immediate capital gains tax and removes the asset from the donor’s taxable estate, resulting in potential tax savings of up to 48% in high-tax environments.

2. Asset Protection

Assets inside the trust are shielded from lawsuits against the grantor, often providing stronger and simpler protection than offshore alternatives.

3. Immediate Income Tax Deduction

The donor receives a charitable income tax deduction based on the present value of the remainder interest passing to charity. This deduction is influenced by the donor’s age, payout rate, and prevailing Applicable Federal rate (AFR).

For example, assuming:

• $1,000,000 contribution
• 5% payout rate
• Current AFR

Estimated deductions may be approximately:

• Age 55: $207,480
• Age 60: $258,260
• Age 65: $319,250
• Age 70: $390,790
• Age 75: $472,320

4. Lifetime Income Stream

The trust pays income to the designated beneficiaries, for the trust term, often for life, at a minimum rate of 5% of the trust’s annually determined fair market value. Income taxation follows a favorable four-tier system that can significantly benefit recipients depending on trust investment performance.

5. Wealth Replacement for Heirs

Many families use part of the tax savings to fund life insurance outside the trust, effectively replacing the value to heirs that pass to charity and preserving family inheritance.

Real-World Case Study: Turning a Vacation Home into Lifetime Income, Tax Savings, and Legacy Impact

To bring this strategy to life, consider the real-world example of a retired couple preparing for their next chapter.

The Situation

A 65-year-old couple owned a vacation home in Big Bear, California, purchased 25 years ago for $200,000. Over time, the property was appreciated significantly and now worth $1,000,000.

As they planned for retirement, they decided to sell the property to help fund a future retirement home and support their long-term income needs.

Option 1: Selling the Property Outright

If the couple sold the home directly:

• Estimated capital gains and related taxes: $288,800[ii]
• Net proceeds after tax: $711,200

If they invested those after-tax proceeds at a 6.5% annual return, and lived the 30.6 years projected by IRS life expectancy tables, they would receive approximately:

👉 $1,141,578 of total lifetime income

Option 2: Using a Capital Gains Bypass Trust (CRT)

Instead, the couple explored a Charitable Remainder Trust (CRT)also known as a Capital Gains Bypass Trust, before selling the property.

Here is what changed:

• Zero capital gains tax on the sale
• Immediate charitable income tax deduction: $319,250
• Full $1,000,000 invested inside the trust

Over their projected lifetimes, the trust generated:

👉 $2,207,004 in total lifetime income from CRT portfolio

That is $626,863 more income, simply by avoiding the upfront tax on the sale and allowing the full value of the assets to work for them.

The Legacy Impact

The benefits did not stop with income.

• Upon both spouses passing away, their favorite charity or charities would receive approximately $2,041,441, assuming a conservative 2.5% annual trust growth rate.
• By using the tax savings from the $319,250 deduction to fund a Wealth Replacement Trust (WRT) or life insurance policy, their children would also receive $1,000,000 tax-free[iii].

The Result

With thoughtful planning, the couple was able to:

• Eliminate capital gains tax.
• Increase lifetime income.
• Support causes they care about.
• Replace inherited wealth for their children.
• Create certainty, flexibility, and peace of mind.

All using a strategy already built into the U.S. tax code.

The Six Critical Decisions in Establishing a CRT

Although CRT documents are lengthy and complex, the planning process comes down to six key decisions:

1. Type of Trust

A NIMCRUT (Net Income with Make-Up Charitable Remainder Unitrust) may be the recommended choice.

This structure pays the lesser of:

• The stated payout percentage, or
• Actual income earned

In a NIMCRUT, unused income can “carry forward” to future years, providing flexibility when income is not needed immediately. Other options include standard unitrusts and annuity trusts, which may be appropriate in specific circumstances.

2. Trust Term

The trust may last:

• For one or two lifetimes.
• For a fixed term of up to 20 years.
• Or a combination of both.

3. Payout Percentage

Lower payout rates generate larger charitable deductions. The maximum allowable payout is constrained by IRS rules requiring at least 10% to remain for charity at trust termination.

4. Charitable Beneficiaries

Charities may be changed over time. Many donors name a Donor-Advised Fund (DAF) to retain flexibility in charitable giving.

5. Definition of Income

Advanced trusts may include “post-contribution capital gains” in the income definition, an important but technical strategy that often warrants its own discussion.

6. Trustee Selection

Grantors often serve as the initial trustees and may name a licensed professional trustee, bank, financial institution, family member, or professional advisor as a co-trustee and/or successor trustee for continuity.

Finding the Right Professional Advisors

CRTs require coordination among CPAs, attorneys, investment advisors, and insurance professionals. Several respected professional organizations, including NAEPC (www.naepc.org) provide access to qualified specialists.

Final Thoughts

As trillions of dollars move from one generation to the next, Charitable Remainder Trusts remain one of the most effective tools available for reducing taxes, preserving income, protecting assets, and creating meaningful charitable impact.

A CRT is one of many strategies that can help protect your legacy and reduce tax exposure. Licensed financial professionals may fail to introduce this concept when discussing large asset sales or estate planning with their clients. Hopefully, this article serves both as a reminder and a call to action.

[i] Internal Revenue Code (IRC) Section 664

[i]I This estimate includes the maximum federal long-term capital gains tax rate of 20%, the 3.8% Net Investment Income Tax (NIIT) under Section 1411, and the applicable California state capital gains tax rate (up to 13.3% for high earners), alongside standard depreciation recapture rules where applicable

[i]ii Crescendo Interactive, Inc. (Camarillo, CA) is a major and planned gifts marketing solutions and donor proposal software provider founded in 1984, specializing in tax-planning calculators utilized by nonprofit institutions and professional advisors.

Author Biography

Chuck McLucas, CPA, PFS, AEP®, CKA®, is the Managing Director of Bourque & McLucas CPAs and President of Charitable Trust Administrators. With over 50 years of experience in tax, financial planning, and professional investment management, he specializes in high-net-worth estate planning and has overseen the development of more than 400 charitable giving instruments for individuals and institutions.

Contact Information:

Email: cmclucas@ctai-ca.com
Phone: (949) 981-4452
Website: bourquemclucas.com